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TheStreet Open House

SunTrust: Financial Loser

Stocks in this article: WMTAXPSTII:BKX

NEW YORK ( TheStreet) -- SunTrust (STI) was the loser among the largest U.S. financial companies on Monday, with shares pulling back 2% to close at $29.76.

The broad indexes were down slightly, as investors awaited the results of a two-day meeting of European finance ministers in Luxembourg, which may include a financial aid package for Spain.



The KBW Bank Index (I:BKX) declined slightly to close at 51.17, with all but three of the 24 index components seeing declines. The index has returned 30% year-to-date, compared to an 11% return for the Dow Jones Industrial Average and a 16% return for the S&P 500 (SPX.X).

So what are investors to think about bank stocks, heading into third-quarter earnings, with mixed economic signals, and a financial industry still facing so many challenges?

"Our large cap bank coverage universe now trades at a median P/E multiple of 10.2x our 2013 EPS estimates," Stifel Nicolaus analyst Christopher Mutascio said early Monday, adding that the median forward price-to-earnings ratio for banks covered by his firm was "76% of the S&P 500 2013 P/E multiple of 13.5x - which is dead in line with the group's 15+ year median of 76%."

Mutascio also said that the group of banks covered by trades for the same 10.2 multiple of consensus earnings estimates.

The analyst also said that "if the banks continue their recent outperformance, then investors must be either arguing for an upward revaluation of the sector (banks are worth more today versus the broader market than they have historically) or they suspect the earnings normalization process will happen sooner than later." Using Stifel Nicolaus's "normalized" earnings estimates, Mutascio said banks covered by his firm would trade at a median forward P/E of "70% of the S&P 500's current 2013 P/E multiple (9.5x vs. 13.5x)," which "could suggest some further outperformance against the broader market for the banks will occur until they achieve the historical P/E multiple of 76% of the S&P 500."

Investors may be taking the long view and looking past the media and the brokerage analysts -- who typically rate stocks with 12-month investment horizons -- as they appear "currently willing to value the banks on what their future earnings prospects could be under a more normal interest rate environment (no matter when it may occur) or perhaps they are awarding a higher multiple for mortgage banking activity than they have historically."

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